FEES 4 Annex 12 Guidance on the calculation of tariffs set out in FEES 4 Annex 1AR Part 38

(1) In calculating the new regular premium business element of its Adjusted Gross Premium Income, a firm (A) should not include business transferred from another firm (B) under the procedure set out at Part VII of the Act, during the relevant financial year, provided that that transfer did not involve the creation of new contracts between the policyholders subject to the transfer and A. This is because that business is existing business even though it is new from the point of view of A. This means that if new contracts are created as part of the transfer, that business should be included in the calculation of As new regular premium income business.

(2) If any business is transferred to a firm (A) from another firm (B) under the procedure set out at Part VII of the Act and that business would have been included in B's tariff base as new regular premium business in the absence of such a transfer, this business should be included in either A's or B's tariff base, depending on the date of transfer. FEES 4.3.15R explains in whose tariff base it should be included.

(3) Mathematical reserves should take account of all of A's business, including all new business transferred from B.

Calculating annual income

(1) Annual income should include all amounts due to the firm arising out of the regulated activities referred to in fee-blocks A.12, A.13 and A.14 for which the firm holds permission8, including regular charges and instalments due to the firm during the reporting year.

The firm should refer to the fee-block definitions in FEES 4 Annex 1A R88, Part 1 to decide which particular income streams should be taken into account when calculating its annual income for the purposes of fee-blocks A.12, A.13 and A.14.

(2) To avoid any doubt, the firm should exclude from the calculation of its annual income any regulated activities belonging to fee-blocks A.12, A.13 and A.14 where the performance of such regulated activities is entirely incidental to the carrying out by the firm of the regulated activity of managing investments belonging to fee-block A.7.

(3) To avoid double-counting, amounts which have been passed on to other firms may be excluded from the calculation of annual income. Transfers of income to other firms may be especially common within groups where, to present a single interface to clients, all amounts due to the group may be collected by one firm for subsequent redistribution to other firms within the group. It is for groups themselves to decide the most convenient way to report such annual income - i.e. whether the firm which receives the full amount should declare that full amount, or whether each firm in the group should report its separate distribution.

(4) The firm should include earnings from those who will become its appointed representatives immediately after authorisation.

(5) If any fee payable by the firm to another party for arranging a transaction with a client exceeds the amount payable by the end client, the firm may not take that excess into account in calculating the net amount retained but must instead net the sum payable by the end client to zero.

(6) The total should include administration charges and any interest from income related to the regulated activities.

(7) Items such as general business expenses (e.g. employees' salaries and overheads) should not be deducted, nor any penalties or fines that have been levied against the firm.

(8) Rebates to clients should be excluded and also fees or commission passed to other authorised firms.

(9) Authorised professional firms should exclude income from non-mainstream regulated activities. They may estimate the proportion of their business that is derived from those activities and split the income from individual invoices accordingly.

Apportioning income

Where a firm cannot separate its income on the basis of activities, it may apportion the income on the basis of the proportionate split of business that the firm otherwise undertakes. For instance:

(1) If a firm receives annual income from a platform-based business it may report this in line with a wider breakdown of its activities.

(2) A firm providing corporate finance advice which does not maintain records of the split between regulated activities and non-regulated activities for individual cases may calculate that regulated business accounts for a certain proportion of its business overall and apply that as a multiplier across its income.

(3) A firm may allocate ongoing commission from previous business on the basis of the type of firm it receives the commission from. This avoids tracking back legacy business which may no longer match the provider's current business model.

(4) An authorised professional firm may estimate the proportion of its business that is derived from regulated activity and split its income for individual invoices accordingly.

(5) If a firm has invested income from regulated activities, then any interest received should be reported as income, in proportion to the volume of regulated business it undertakes to avoid tracking back old payments.

(6) Firms' systems ought to be able to distinguish UK from non-UK business to establish which conduct of business regime it was conducted under. If, however, they do not relate the figures back to income streams for the specific regulated activities in a particular fee-block then the firm may make a proportionate split as described above, calculating its regulated UK income on the basis of the overall split between UK and overseas income.

(7) It is for individual firms to determine how they should calculate the appropriate split of income. The FCA8 is not prescriptive about the methodology. It requires only that:

(a) the approach should be proportionate - the FCA8 is looking for firms to make their best efforts to estimate the split;

(b) the firm must be able on request to provide a sound and clearly expressed rationale for its approach - for example, if all invoices were analysed over a particular period, the firm should be able to justify the period as representative of its business across the year;

(c) the methodology should be objective - for example, based on random sampling of invoices or random stratified sampling;

(d) the firm must on request be able to provide an audit trail which demonstrates that the choice of methodology was properly considered at an appropriate level or in the appropriate forums within the firm, and the decision periodically reviewed at the same level or in an equivalent forum.